‘No clarity on Vodafone-type cross-border deals’

SummaryFinance Minister P Chidambaram's statement on Monday on GAAR did not provide clarity on how he intends to define the tax policies in regard to Vodafone-type deals involving transfer of underlying Indian assets, said tax experts.

Finance Minister P Chidambaram's statement on Monday on GAAR did not provide clarity on how he intends to define the tax policies in regard to Vodafone-type deals involving transfer of underlying Indian assets, said tax experts.

Armed with retrospective amendments in tax laws that overturned an SC ruling that said Indian tax authorities have no jurisdiction over the 2007 Vodafone deal, Chidambaram said an approving panel that would be a neutral arbiter between the assessee and taxman in the GAAR regime “may have regard to the period or time which the arrangements had existed...” (In the Vodafone case, the corporate structure that allowed London-headquartered telecom firm and Hong Kong-based Hutchison to clinch the deal that created Vodafone-Essar in India had existed much before the 2007 transaction).

So, in future Vodafone-like cases, one of the criteria for deciding the taxability in India would be how long the arrangement had preexisted.

Chidambaram's statement on Monday, however, did not dwell on the other aspect the Shome committee had looked into – retrospective amendments, including that on taxation of cross-border transaction with underlying Indian assets. While Vodafone has received a fresh tax demand from the tax authorities under the retrospective amendment that overturned the SC judgement, the tax authorities have scheduled a meeting with the firm this week.

“We are awaiting the final recommendations of the Shome panel's suggestion on indirect transfers and the subsequent changes that the government will have to bring out regarding that. The proposed Direct Taxes Code also has a provision on indirect transfer,” said Sunil Kapadia, Partner, Ernst & Young.

The Shome panel has reportedly favoured only prospective application of tax law in such cases. It had also recommended the waiver of interest and penalty if the government chooses to retrospectively apply norms.

"Though the government can use the Income Tax Act to go after such cases even now, we expect it to make its position clear in the forthcoming Budget on retrospective taxation,” he said.

“After these (GAAR) come info force, certainly tax authorities will have more teeth to go after cases including where there is an indirect transfer of underlying assets in India,” Neeru Ahuja, Partner, Deloitte Haskins & Sells said.

One of the basis of the tax demand by authorities in Vodafone-like cases, where there was an indirect transfer of underlying assets in India, was that the source of income in such cases was